With home prices surging, here are 6 ways to leverage your home equity

US home prices are as high as they've ever been -- and the market shows no signs of cooling off. According to a report from real estate marketplace Zillow, average home prices in 46 of the nation's 50 largest metro areas grew by more than 10% in May compared to the previous year. And home values have increased by more than 13% on average since last year. In June, the median home price in the US was $385,000, compared to $342,000 in June 2020. 

All of that may be troubling news for prospective home buyers -- but millions of homeowners across the US are benefiting from this unprecedented spike in home values. And there are plenty of ways to tap into their home equity, including a home equity loan, a line of credit and a cash-out refinance. But just as important is the question of how to best leverage that equity. In addition to outlining some of my own moves below, I've interviewed homeowners from across the US to explore the different ways you can take advantage of your blossoming home equity. 

Renovate or remodel

Tapping into your home's value doesn't require selling it. If you're planning to stay put, using your equity for home improvements is an excellent way to make your space more livable -- and enhance its resale value. 

In 2009, web designer and blogger Will Creech bought his 1956 midcentury-modern home in Charlotte, North Carolina. "At the time, it was a little on the high side at $270,000, but now it's now worth $500,000," he says. Creech and his wife have invested most of their equity into home renovations, and while they've discussed moving or adding new upgrades in the future, Creech is generally content to stay where they are. "If the value continues to climb, I would personally prefer to do nothing," he says.

Some renovation projects can add more value to your home. According to a Homelight study, refinishing or installing hardwood floors, focusing on curb appeal and replacing an old roof have the highest return on investment. And, depending on which projects you choose, a portion of your loan interest may be tax-deductible. See the IRS's guide of qualified deductions here.

Build a new home

I was one of the millions of people who tapped into their home equity last year using a cash-out refinance loan. Some used the cash to create an emergency fund or pay bills. Others used it to finance home renovations, as spending opportunities outside the home narrowed. But I had my eye on retirement. 

When I moved to Seattle in 2012, I was shocked by the already pricey and competitive real estate market. My husband and I scraped together 20% for a down payment on a craftsman home outside the city and watched over the next nine years as house prices doubled -- and then tripled -- in our region. 

We refinanced our original mortgage at a lower interest rate and knocked $500 off the monthly payment. The cash-out refinance added $400 to our monthly payment. In the end, we're now paying $100 less per month to maintain the mortgages on our primary residence and a vacation home in Chelan, Washington, where we'll live after retiring. 

Get better mortgage terms

If a valuation boost has expanded your home equity past the 20% threshold, now might be a good time to refinance. A high house value coupled with a low interest rate can open the door to new mortgage opportunities: You can shorten your loan term, shave down your monthly payment or cancel your private mortgage insurance -- a policy you're required to have only when you have less than 20% equity in your home. 

Jacqueline Sanchez executed a couple of these moves. The real estate investor and co-owner of Invested Wallet, a personal finance website, bought her home in Omaha, Nebraska, for $209,000 in 2015 -- and its value has continued to climb since. "According to Zillow, my home was worth $306,000," she says. "With the increase in value, I refinanced to get rid of the mortgage insurance and reduced my loan term by five years."

Buy an investment property

Being a landlord is a great way to earn passive income. If you've built up equity through your primary residence, you could divert a portion of it toward purchasing a rental property. 

Tawnya Redding bought her first home in a suburb of Portland, Oregon, in 2015. "I've diligently worked to pay my mortgage down ahead of schedule," the personal finance blogger says. "That, combined with the drastic increase in home prices in the area, has me sitting on over $250,000 in equity." Redding plans to take out a home equity line of credit, or HELOC, when the time is right. "My plan is to continue to save, build equity and be prepared for when and if the market slows or flips," she says. 

Pay for college 

College is already expensive, and the price of a four-year degree is expected to cost roughly $200,000 by 2036, according to Vanguard. You can use your increasing home equity to help cover the cost of tuition in the future. 

That's Alexander Lowry's plan. "We purchased our home in Hamilton, Massachusetts, when I moved to the area to teach," the Gordon College professor and father of two says. "We closed in February 2018 for $560,000, and our house is now valued at over $700,000. I view the rise in value as the opportunity to pay for college for our girls."

Lowry's kids are toddlers now. But he plans to sell the home once they're closer to college age. But that's only one avenue when it comes to using equity to pay for education -- you could also use a cash-out refinance or HELOC. And you can pour the proceeds into a tax-advantaged 529 college savings plan or a Roth IRA.

Sell your home and move

The most obvious way to cash in on your equity is to sell your home and put the proceeds toward a down payment on a new property. According to the National Association of Realtors, 6.5 million US homeowners sold their properties last year -- the highest number since 2006. Once you sell, however, you'll need a new place to live, which can pose a significant challenge. As we noted in our companion article outlining the ways to tap into home equity, prices are high just about everywhere, competition is fierce and it's increasingly difficult to find a home equity arbitrage opportunity. 

But it's not impossible. Perry Knight and his family sold their home in Tulsa, Oklahoma, last year for 35% more than they paid for it in early 2017. The cycling enthusiast and blogger says the financial windfall presented a perfect opportunity to relocate to Fort Lauderdale, Florida, to live closer to family. "The market value was a huge surprise to us," Knight says. "We were not thinking of selling until we realized that we were in a very good position to do so. We had all the intentions of raising our family in Oklahoma at the time." The Knights paid cash for their Florida home and were able to settle near their relatives. They also managed to set aside $10,000 after completing the transaction.